INTRODUCTION TO

O P E R AT I O N S
MANAGEMENT

CHAPTER 1
LESSON OBJECTIVES
2

At the end of the session, students should be able to:

• To introduce operation management and relate to distinction
1 between goods and services.

• To explain the basic definitions of operations management

2

• To explain the differences between production & productivity

3

• Identify the critical variables in enhancing productivity

4

OPM530/533 INTRODUCTION TO OPERATIONS MANAGEMENT 2

 OVERVIEW OF OPERATIONS MANAGEMENT
3

Product / output can be goods or services

Production is the creation of goods and

services

Operation management can be defined

as the sets of activities that creates value
in the form of goods and services by
transforming inputs into outputs

OPM530/533 INTRODUCTION TO OPERATIONS MANAGEMENT 3

 4

The Economic System

4
Inputs Transformation Outputs

Labor -Assembly processes Goods

capital -Manufacturing processes and
management -Fabrication processes services
Machines -Chemical processes
Material -Services processes
Money
MIS -Form value
methods -Time value
-Exchange value

Feedback loop
-Process measurement/productivity
-Quality control Figure 1.6
-Cost Control
-Delivery Control
OPM530/533 INTRODUCTION OPERATIONS MANAGEMENT
ORGANIZING TO PRODUCE GOODS & SERVICES 5

5
To create goods and services, all organizations perform three function:
a) Marketing
b) Production/Operations
c) Finance/Accounting

Why study OM?

a) Study how people organize themselves for productive
enterprise.
b) Want to know how goods & services are produced.
c) Understand what operations managers do.
(Planning, organizing & controlling)
d) It is such a costly part of an organization.

OPM530/533 INTRODUCTION TO OPERATIONS MANAGEMENT

PRODUCTION AND ITS RELATIONSHIP WITH OTHER
DEPARTMENTS

Commercial Bank

Operations Finance Marketing

Teller Investments Loans
Scheduling Security Commercial
Check Clearing Real estate Industrial
Collection Financial
Transaction Personal
processing Accounting
Mortgage
Facilities
design/layout
Vault operations Auditing
Maintenance Trust Department
Security

OPM530/533 INTRODUCTION OPERATIONS MANAGEMENT 6

PRODUCTION AND ITS RELATIONSHIP WITH OTHER
DEPARTMENTS
Airline

Operations Finance/ Marketing

Ground support accounting Traffic
equipment Accounting administration
Maintenance Payables Reservations
Ground Operations Receivables Schedules
General Ledger Tariffs (pricing)
Facility
maintenance Finance Sales
Catering Cash control Advertising
Flight Operations International
exchange
Crew scheduling
Flying
Communications
Dispatching
Management science
Figure 1.1(B)
OPM530/533 INTRODUCTION OPERATIONS MANAGEMENT 7
PRODUCTION AND ITS RELATIONSHIP WITH OTHER
DEPARTMENTS
Manufacturing

Operations Finance/ Marketing

Facilities accounting Sales
Construction; maintenance promotion
Disbursements/
Production and inventory control credits
Scheduling; materials control Advertising
Quality assurance and control Receivables Sales
Payables Market
Supply-chain management General ledger
Manufacturing research
Tooling; fabrication; assembly Funds Management
Design Money market
Product development and design International
Detailed product specifications exchange
Industrial engineering Capital requirements
Efficient use of machines, space,
and personnel Stock issue
Process analysis Bond issue
Development and installation of and recall
production tools and equipment

OPM530/533 INTRODUCTION OPERATIONS MANAGEMENT Figure 1.1(C)

8
 WHAT OPERATIONS MANAGERS
DO
• Basic Management Functions

planning

Organizing

Staffing

Leading

Controlling

OPM530/533 INTRODUCTION OPERATIONS MANAGEMENT 9

 SIGNIFICANT EVENTS IN OM

Figure 1.4

OPM530/533 INTRODUCTION OPERATIONS MANAGEMENT

 DIFFERENCE BETWEEN GOODS & SERVICES
TABLE 1.3
CHARACTERISTICS OF SERVICES CHARACTERISTICS OF GOODS
Intangible: Ride in an airline seat Tangible: The seat itself
Produced and consumed simultaneously: Beauty salon Product can usually be kept in inventory (beauty care
produces a haircut that is consumed as it is produced products)

Unique: Your investments and medical care are unique Similar products produced (iPods)

High customer interaction: Often what the customer is Limited customer involvement in production
paying for (consulting, education)
Inconsistent product definition: Auto Insurance Product standardized (iPhone)
changes with age and type of car
Often knowledge based: Legal, education, and medical Standard tangible product tends to make automation
services are hard to automate feasible
Services dispersed: Service may occur at retail store, Product typically produced at a fixed facility
local office, house call, or via internet.
Quality may be hard to evaluate: Consulting, Many aspects of quality for tangible products are easy
education, and medical services to evaluate (strength of a bolt)
Reselling is unusual: Musical concert or medical care Product often has some residual value

OPM530/533 INTRODUCTION OPERATIONS MANAGEMENT

 Characteristics of Goods

 Tangible product
 Consistent product
definition
 Production usually
separate from
consumption
 Can be inventoried
 Low customer
interaction

OPM530/533 INTRODUCTION OPERATIONS MANAGEMENT 12

 Characteristics of Service

 Intangible product
 Produced and consumed at same
time
 Often unique
 High customer interaction
 Inconsistent product definition
 Often knowledge-based
 Frequently dispersed

OPM530/533 INTRODUCTION OPERATIONS MANAGEMENT 13

DIFFERENCE BETWEEN GOODS & SERVICES
14

Attributes of GOODS Attributes of SERVICES

Product can be resold Reselling a service is unusual

Product can be inventoried Many services cannot be inventoried

Some aspects of quality are measurable Many aspects of quality are difficult to
measure
Selling is distinct from production Selling is often a part of the service

Product is transportable Provider, not product, is often transportable

Site of facility is important for cost Site of facility is important for customer
contact
Often easy to automate Service is often difficult to automate

Revenue is generated primarily from Revenue is generated primarily from the

the tangible product intangible service.

OPM530/533 INTRODUCTION OPERATIONS MANAGEMENT 14

NEW TRENDS IN OM 15

 Ethics
 Global focus
 Environmentally sensitive production
 Rapid product development
 Mass customization
 Empowered employees
 Supply-chain partnering
 Just-in-time performance

OPM530/533 INTRODUCTION OPERATIONS MANAGEMENT 15

 NEW TRENDS/ CHALLENGES IN OM
Traditional Approach Reasons for Current Challenge
Change

Ethics and regulations not at the Public concern over pollution, High ethical and social
forefront corruption, child labour, etc. responsibility; increased legal and
professional standards
Local or national focus Growth of reliable, low cost Global focus, international
communication and transportation collaboration

Lengthy product development Shorter life cycles; growth of global Rapid product development; design
communication; CAD, Internet collaboration

Low cost production, with little Public sensitivity to environment; Environmentally sensitive
concern for environment; free ISO 14000 standard; increasing production; green manufacturing;
resources (air, water) ignored disposal costs sustainability

Low-cost standardized products Rise of consumerism; increased Mass customization

affluence; individualism

Emphasis on specialized, often Recognizing the importance of the Empowered employees; enriched
manual tasks employee’s total contribution; jobs
knowledge society
“In-house” production; low-bid Rapid technology change; Supply-chain partnering; joint
purchasing increasing competitive forces ventures; alliances
Large lot production Shorter product life; increasing need Just-In-Time performance; lean;
to reduce inventory continuous improvement

OPM530/533 INTRODUCTION OPERATIONS MANAGEMENT 16

 Productivity Challenge
17

Productivity
Is the ratio of outputs (goods and services)
divided by the inputs (resources such as
labor and capital)
The objective is to improve productivity!

Important Note!
Production is a measure of output
only and not a measure of efficiency

OPM530/533 INTRODUCTION OPERATIONS MANAGEMENT 17

 Productivity Variables
18

1. Labor - contributes about 10% of

the annual increase (basic edu, diet
of labor force and social overhead-
transportation, sanitation)

2. Capital - contributes about 38% of

the annual increase (when the
capital invested per employee
drops, there will be drop in
productivity)

3. Management - contributes about

52% of the annual increase
(through the use of knowledge and
application of technology-
knowledge societies)
OPM530/533 INTRODUCTION OPERATIONS MANAGEMENT 18
 OPERATION IN THE SERVICE
SECTOR
• Services – Economic activities that typically produce an intangible
product (such as education, entertainment, lodging, government,
financial, and health services)

• It provides a special challenge to the accurate measurement of

productivity and productivity improvement

OPM530/533 INTRODUCTION OPERATIONS MANAGEMENT 19

 Productivity in the service sector
20

1. Typically labor intensive (e.g.: counseling,

teaching)
2. Frequently focused on unique individual
attributes or desires (e.g.: investment advise)
3. Often an intellectual task performed by
professionals (e.g.: medical diagnosis)
4. Often difficult to mechanize and automate
(e.g.: haircut)
5. Often difficult to evaluate for quality (e.g.: the
performance of a law firm)

OPM530/533 INTRODUCTION OPERATIONS MANAGEMENT 20

 Productivity

Units produced
Productivity =
Input used

 Measure of process improvement

 Represents output relative to input
 Only through productivity increases can our
standard of living improve

OPM530/533 INTRODUCTION OPERATIONS MANAGEMENT 21

OPM530/533 INTRODUCTIONS TO OPERATIONS MANAGEMENT

THANK YOU

22